Aug. 21, 2001
FROM THE AIRWAVES
Creating and Exporting Irresponsibility
From the Airwaves is a transcript
of The GW Washington Forum, the weekly public affairs radio
program produced by GW, hosted by Richard Sheehe, and broadcast on WWRC-AM
1260 in Washington. This conversation with Lawrence Mitchell, professor
of law, comes from a recent program. His new book, Corporate Irresponsibility:
Americas Newest Export, is due to hit bookstores in the
fall. His book is a survey of what happens when companies focus too
much on the short term bottom line and why this attitude is being picked
up by other countries now.
Richard Sheehe: What is corporate irresponsibility?
Lawrence Mitchell: The way weve structured
American corporations and the markets in which they are situated, corporations
literally dont have to be responsible for their behavior. The
way weve done this is by creating a corporate structure in law
in which all the power is held by the managers or directors and the
stockholders. None of the other groups, which is all of us that major
corporations affect, have any say in the way the corporation is run
except to the extent they may have contractual dealings with the company.
What I mean by irresponsibility is that by creating a structure in which
the power is so centrally limited, and situated in a market in which
we expect the corporation to be maximizing its stock price, weve
literally created a situation in which the corporations only responsibility,
as we all see it, is to maximize stock price. It is, in effect, a moral
excuse not to be responsible or accountable to anyone else. My argument
is that corporations ought to be morally accountable in the same way
that any one else is. It doesnt necessarily mean that every corporation
is going to behave well.
RS: How is this picture different from
30 or 40 years ago?
LM: Technically its not. We have
the same basic structure of the American corporation that weve
always had. Whats different is two things. The first is the structure
of stock holding in America. The second is what I would call American
social ethics. The structure of stock holding over the last 30 years
has been this concentration in the hands of institutional investors.
Previously, stock was dispersed among a relatively small segment of
the population, but not a segment that was going to be concerned about
anything other than wealth creation. They were investing, for the most
part, over the long term. As more wealth has been generated, as more
Americans have become beneficiaries of pension funds, as the stock market
has heated up and cooled down and become subject to public interest,
more Americans have invested through the rise of mutual funds and pension
funds. Thirty years ago, mutual funds barely existed. The result has
been that all of the money gets funneled indirectly in through these
intermediaries, creating a concentration of wealth in the hands of institutional
investors. In some big companies, as much as 90 percent of the stock,
and I think Coke is an example, is held by institutional investors.
Not five institutional investors, maybe 100, but a small enough group
so that should they choose to, they could exert pressure.
RS: Does all of this focusing on the bottom
line change depending on whether were looking at a good economy
or a rough economy?
LM: Its hard to say because the dominance
in this way of thinking is really only the product of the last 10 years
or so. And during those last 10 years, with the exception of the first
Bush recession, we had a very good economy up until now. Its hard
to say whether a bad economy wakes people up. But I think youre
going to see lots of layoffs, in part to keep the businesses running,
but in part to keep the stock prices up, as well.
RS: I was looking at the description of
your book and part of it reads, Corporations are so often focused
on making short-term profits for their stockholders that they behave
in ways that adversely affect their employees, the environment, consumers,
American politics and even the long-term well-being of the corporation.
What is this behavior doing to the corporation? If youre boosting
your stock price, how can that be bad?
LM: Well, it can be bad if youre
boosting your stock price at the expense of long-term investment. Most
managers would argue that investing in R&D, which we under-invest
in dramatically compared with other developed countries, is something
that is good for the long-term well-being of the corporation, even though
its a current expense. Its going to adversely affect your
earnings report. Our current market environment, where analysts and
stockholders jump on earnings reports and devour them like rabid dogs
and then drop the stock price, is bad for the corporation. The focus
on what the stock is worth today is very much a short-term focus and
does not incorporate the long-term. Nobodys asking what they are
planning for the future or how are they planning to deal with whatever
business problems come up.
RS: It sounds as though Americans, at least
those in charge of the financial world, just dont have as long
of an attention span as their predecessors.
LM: No, they dont. But I dont
think, for the most part, that its the managers fault. I
think its our fault. Its our fault that we have this short-term,
self-centered focus on immediate gain. And depending on which set of
statistics you look at, the peak earning capacity of a money manager
comes at about the age of 40. But if thats what youre working
for and thats your peak earning capacity, then youre going
to be pushing to make as much money as you can before that time hits
when youre getting old. There may be something, also, to a short-term
focus in general in our society. But theres also been, and it
think its a phenomenon thats developed over 20 years, an
ethic of instant self-gratification.
RS: A major point of your book is that
this view is being exported and other countries are starting to adopt
this perspective. Can you explain this?
LM: This is a phenomenon thats related
to globalization in a very particular way, an American way. I think
youll find theres an excess of investment capital in the
United States. During the early and mid 1990s, American investment bankers
had so much money that they needed new investment opportunities. Well,
they took those investment opportunities abroad. American investment
bankers, who needed to make more money, went over and started selling
deals, which is what mergers and acquisitions investment bankers do.
They would look and say, well, if we take over this one, you can
unlock X value and thats going to increase the stock price, and
entice the Europeans into beginning this process of Americanization
first through hostile takeovers, but secondly, through investment.
Mutual funds and pension funds have invested very heavily in European
companies and investing in European companies began to bring pressure
on management to develop American-style ways of structuring their corporation...Im
all for corporate capitalism, but there are different ways of doing
corporate capitalism and I think the way we do it has become, particularly
in the long term, highly destructive of our own system and these European
systems.
RS: Where do you start looking for solutions?
LM: The problems that Ive been talking
about are fairly complex. I dont pretend for a minute that theres
any one particular cause. These are the causes Ive identified
as being most significant. Nor is there any one particular solution.
If the problem is centrally a real short-term pressure in the market
caused by structure, and a market that really is unregulated, then we
have to overcome that by, in effect, disciplining ourselves. One of
the ways of doing that is that the financial reporting system in this
country is wrong. Its much too short term. Theres no reason
for corporations to have to issue quarterly reports. Warren Buffett
claims he doesnt look at them. He says, whats going
to happen in a quarter that Im going to care about? Yet,
corporations are required under the securities laws to issue quarterly
reports. It seems to me that one thing we can do is lengthen financial
reporting periods. I suggest a year in the book, maybe its longer
than that. Thats not to say a corporation couldnt voluntarily
release information in the interim, but then it risks being perceived
as a corporation with a short-term focus. The default rule ought to
be longer times between reporting periods. One of the phenomena that
you see, thats diminished somewhat, but as of a year ago, is that
15 percent of the market volume everyday was daytrader volume. Daytraders
dont know squat. They are trading solely on price. One possibility
is to reexamine at the capital gains structure and have punitive capital
gains taxes for really short-term trading. Obviously, there would have
to be exceptions for market specialists. But theres no excuse
for people to turn over stocks everyday.
RS: The past couple of years, weve
seen more vocal protests at global meetings in Genoa, Washington, and
Seattle. Whats your take on that? Are you glad to see a more vocal
opposition to some of this globalization? Are they on the mark in your
view, or should they be focusing on some of the things youve mentioned?
LM: I dont think they are particularly
focused and thats the problem. Yes, Im glad to see the protests
because, if nothing else, even if theyre unfocused, the protests
do make global leaders aware that there are serious problems that need
to be addressed. What I would prefer to see is some centralization to
the protests. I have received a major grant from the Ford Foundation
and created the International Institute for Corporate Governance and
Accountability, which now numbers among its members people around the
world academics, policy makers and the like for the purpose
of trying to come up with a centralized form. Weve got a Web site
up now www.law.gwu.edu/iicga. Were going to have publications.
This may not be the only solution and it may not be the best one, but
there need to be focused discussions. There needs to be a centralized,
serious, non-violent, not-on-the-streets forum for the opposition.
RS: Youve been a law professor here
at GW for 11 years. Before that, you were in mergers and acquisitions.
Did that motivate you to start thinking more along these lines and writing
books?
LM: Its hard to say what motivated
me. Part of my motivation to leave that and go into teaching was the
realization that my mother didnt raise me to make investment bankers
rich, which was basically the job I had. Yes, I saw lots and lots of
deals that were non-economic deals, or if they were economic, they were
economic because of tax considerations. And they werent adding
value. They were just making investment bankers rich. I didnt
want to devote what talent I may have to that process.
Send feedback to: bygeorge@gwu.edu